Cheap Oil: Crude Dips Below $80; How Low Can It Go?

Crude futures dipped below $80 a barrel this morning before rebounding slightly. But crude is still down more than $5 on the day, due to fears oil demand will seize up in the coming economic slowdown.

The bears are feeding themselves (AP)

That’s prompted the International Energy Agency in Paris to again slash its estimates of the growth in oil demand. The IEA, the energy arm of the rich-country club OECD, figures demand will only grow 0.5% this year and 0.8% next year, well off earlier, rosier forecasts. But despite all the economic gloom, the IEA still expects oil demand to grow.

That has some oil analysts puzzled. Many think demand for oil is already moving backwards, not just growing more slowly. And the IEA seems bullish enough on 2009—it expects oil demand to reach a record in the fourth quarter of next year, led by China and other developing countries. It also expects oil supplies to jump next year by about 1.5 million barrels per day, or about 1.6% of total global supplies.

Where is that oil meant to come from? OPEC already reached its maximum historic output this year, and since has taken half a million barrels off the market. Next month in Vienna, the oil cartel could cut output further. Non-OPEC countries like Russia and Mexico are struggling to maintain, let alone increase, production. And the IEA recognizes that the credit crunch could further affect oil production. From the WSJ:

[The IEA] also warned that the continuing financial crisis is hurting oil-exploration projects, a worrying sign because the industry is already struggling to add new supply due to various political, cost and technical problems. “Credit shortages are rapidly becoming yet another in a long line of impediments to (oil) industry investment,” the agency said. “Investment is already being affected at a number of highly leveraged companies in locations such as Russia and the Caspian.”

Where oil is headed is anybody’s guess. Demand seems likely to continue to slide. At the same time, when oil-producing countries like Venezuela, Iran, and Saudi Arabia start to feel the pinch from falling crude prices, betting on increased oil supplies seems a risky proposition.

Comments (5 of 18)

Touching the ceiling of oil production , it may rise or fall a little in the time it takes the world economies to recover and ramp back up , with countries like u.s. , china and india , leading the way , but the ceiling will appear again , and again , and then it will start to come down , how long befor this doom , hard to predict when , but be asured it's a certinty ,oil is a finite resource , and the easy to produce oil has been found and is currently being exploited , and fought for

2:00 pm October 14, 2008

Osobored wrote :

Cheap oil is good & bad. Good side is we have cheaper gas, more money for other things. Bad side is, people will drive bigger cars and drive more. Americans never learn, you know. Also bad for those oil-tyrants & fanatics, they won't have so much money to do bad things against the USA.
So, either way, not much good.

1:52 pm October 12, 2008

Benny "Peak Demand' Cole wrote :

Climateer: Thanks for noticing, if you are still reading. I usually post over at R squared.
I think we see declines in global demand for crude, very similar to the 1980-81 declines, when demand fell by 11 percent. That would throw another 8 mbd on the market.
OPEC can't cut that much. Interestingly, that would decrease OPEC revenues, meaning they have to pump more to make more money..meaning worsening gluts.
After the 1981 spike, demand for oil did not recover for 10 years, and then only when oil was cheap again.
This time around, we have biofuels and EVs coming online. We may not see crude demand recover for 15 or 20 years, or maybe ever. It all depends how low the prices goes.
We are talking about 3 mbd of biofuels in just eight years, and continued growth after that, while EVs mean demand falls every year.
New palm hybrids have much higher yields and can grow in more climates. some experimental plantations are yielding 36 tons of oil per hectare, or about 9000 gallons. . These palms can be planted in central Thailand and even the southern rim of Texas and Louisiana.
Lookingout 15-25 years, we may see 10-15 mbd from biofuels, while world crude demand sinks to 60 mbd. That is if the price stays high.
We may also see a crude price tumble to $20 a barrel, and demand grow.
SJ: The marginal cost is not the average cost. It is th cost of bringing one more barrel out of the ground from an existing field. If oil is selling for $20 a barrel, but your marginal cost of production is $21, then you keep selling. As a practical matter, no one ever shuts a field in anyway.

9:05 pm October 10, 2008

Allen Mccloud wrote :

Mike Noble, you are dead wrong. The Mortgage Crisis was created by the Clinton administration in 1998, when they loosened lending standards, and that opened the door for Mostly conservative companies to take on risk. This is not a Republican/Democrat problem, so get your head out of your politics long enough to breath. Enron and World Comm was not created by Clinton or Bush, so this Crisis is not the policies of one man either. Since when has there been one person's policies that affected so many? Jimmy Carter maybe, with the Carter Doctrine, but when you are Slave to a Group of Nations that loath your existences, it is eventual that a breaking point will appear. We may be at that point. Politics aside. How much is en

8:50 pm October 10, 2008

Allen Mccloud wrote :

That is laughable that research and exploration is driving the prices up or controlling them. A year and a half ago when the Cartels and the Speculators decided that greed is the way to go, is when the proverbial S#%t hit the fan. NO Economy can sustain growth with out of control energy costs. Wall Street + I hate anyone except OPEC producers = The great energy crisis of 2008,2009,and 2010. I say the extra 2 years to recover from the idiocy of $147 a barrel of Oil! Thanks for driving the World economy in the toilet you greedy scum! I am pretty sure that I am not the only person who decided after spending $100 to fill up week after week, that maybe I don't need that Plasma TV quite yet, or tone down investing 10% to stick to a budget. We have adapted, but our Government and Businesses need to learn a lesson, and not write checks to those who screwed it up in the first place. I know I ramble, but this is a real middle class working American that has had enough of the excesses of others greed.
PS.
The American Government receives an estimated 1.5 Trillion dollars every five years in taxes from importers of oil. What does our Government produce to garner that type of pure profit? Correct, Nothing. They tax us at the Pump again!

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Environmental Capital provides daily news and analysis of the shifting energy and environmental landscape. The Wall Street Journal’s Keith Johnson is the lead writer. Environmental Capital is led by Journal energy reporter Russell Gold, and includes contributions from other writers at the Journal, WSJ.com, and Dow Jones Newswires. Write us at environmentalcapital@wsj.com.